Crypto Asset Disputes: Case Update

Published: 14/7/2022

Since our last update on cases involving crypto, there have been some important judgments handed down by the English courts in cases concerning breach of contract and fraud claims with implications for holders of crypto assets.

English judges are having to consider how the technology underpinning crypto assets affects the application of established private law concepts. We summarise the latest decisions below.

Can a developer of crypto assets owe a fiduciary duty?

On 25 March 2022, the High Court handed down a significant decision in Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWHC 667 (Ch). In this case, the director of the claimant company (“TTL”) alleged that the encryption keys to access digital wallets stored on his home computer had been stolen during a computer hack, which resulted in a loss of access to crypto assets allegedly valued at $3 billion at the time of the claim, including Bitcoin valued at £1.1 million (the “Lost Assets”). The defendants were a group of developers who, on TTL’s case, control the software of the digital asset networks to which the Lost Assets belong. TTL claimed that the defendants, due to controlling the underlying code of (and thus access to) the Lost Assets, owed  a fiduciary duty to TTL as a holder of such assets. Therefore, TTL argued that the defendants should assist TTL in regaining control of the Lost Assets. TTL sought a declaration that it owned the Lost Assets and an order requiring the defendants to “patch” the blockchain to allow TTL to regain access to the Lost Assets.

TTL claimed that the defendants were able to re-grant it access to the Lost Assets and should do so by way of remedy for the alleged breaches of fiduciary duty. 

Falk J rejected this claim and found that TTL did not have realistic prospects of establishing that the facts pleaded would amount to a breach of fiduciary duty. In summary, Falk J was not convinced (contrary to TTL’s submissions) that an imbalance of power between two parties is a sufficient condition for the existence of a fiduciary duty. In any event, Falk J found that Bitcoin owners could not realistically be described as entrusting their property to a fluctuating and unidentified body of developers of the software comprising bitcoin.

Can cryptocurrency be used as Security for Costs?

Earlier in the Tulip proceedings described directly above ([2022] EWHC 141 (Ch)), TTL had proposed providing security for costs in the form of cryptocurrency, transferring the full amount of security plus a 10% buffer to allow for any fluctuations in value. However, Master Clark held that the security offered by TTL was not sufficient to provide adequate protection for the defendants equal to a payment into court, indicating that cryptocurrency cannot be provided as security for costs. It is well-known that cryptocurrency is volatile, and Master Clark observed that, “a fall in value of Bitcoin […] could result in their security being effectively valueless”.

Can a trust arise from trading cryptocurrency?

In the case of Wang v Darby [2021] EWHC 3054 (Comm), two individuals contracted to exchange specified quantities of cryptocurrency. The claimant, Mr Wang, transferred 400,000 Tezos (which at the time of the exchange was worth approximately US$ 110,000), to the defendant, Mr Darby, in return for 30 Bitcoins. The parties exchanged the cryptocurrencies with the intention that there would be a “reciprocal restoration” of the same amounts on or after a period of 2 years. At the end of this period, Mr Wang sought to exercise the term of the agreement which allowed for the Tezos to be returned and indicated to Mr Darby that he was “ready, willing and able” to transfer the Bitcoin. Mr Darby refused to transfer the Tezos back to Mr Wang.

As a result, a Worldwide Freezing Order (“WFO”) was ordered by the UK courts over the Tezos. The Court was asked to determine whether a trust arose in respect of the transfer of the Tezos, as claimed by Mr Wang, who alleged that there was an express, resulting or constructive trust over the Tezos and that, as such, Mr Darby owed a fiduciary duty in respect of the assets. Mr Darby disputed this and stated that the terms of the agreement were akin to a sale and buy back agreement which would preclude a trust from arising. Mr Wang accepted that the transfer did constitute a full transfer of ownership, however maintained the claim that a trust had arisen. The court reaffirmed that cryptocurrency is treated as property in the UK, as decided in AA v Persons Unknown [2019] EWHC 3556 (Comm): “a unit or token of Tezos constitutes property which can in principle be the subject of a trust. This is so notwithstanding its entirely fungible character and non-identifiable status”, however on these facts the sale/purchase structure logically precluded a trust.  The principal reason for the rejection was the “reciprocal restoration” of the cryptocurrency, with it being “the essential economic reciprocity that precludes any trust”.

In the same proceedings, Mr Wang applied for an order to vary the freezing order ([2022] EWHC 835 (Comm)), arguing that the defendant had access to cryptocurrency “well in excess of the maximum sums the subject of the freezing order and so [was] available to meet both his living and legal expenses” and as such the exceptions to the freezing order for (i) £500 per week on living expenses; and (ii) expenditure on reasonable legal expenses should be removed. The court agreed with his application, and the court removed the living and legal expenses exceptions.

How can we unmask unknown online fraudsters?

A key element of any crypto fraud dispute is identifying the online fraudster. In order to obtain information on alleged fraudsters, for example from crypto exchanges, there are generally two disclosure orders parties can apply for in the English courts:

  1. A Bankers Trust Order, which is a third-party disclosure order available in cases of fraud where a claimant seeks disclosure of documents, normally confidential, which could allow them to trace their misappropriated assets. Generally, the order is made against a defendant’s bank; and
  2. A Norwich Pharmacal Order. Victims of financial crime will often apply for this disclosure order where the identity of a perpetrator is unknown, but useful information is potentially held by a third party, and this disclosure may allow misappropriated assets to be traced.

In the case of Mr Dollar Bill Limited v Persons Unknown [2021] EWHC 2718, the claimant (Mr Dollar Bill Limited) had been defrauded of various crypto assets via an exchange located outside of the jurisdiction. In order to understand how the property might have been misappropriated, and in an attempt to discover who the fraudster was, the claimant requested information from the exchange by seeking a Norwich Pharmacal Order from the UK courts. The court ruled that a Norwich Pharmacal Order could be utilised by the potential victim of crypto fraud despite the respondent being domiciled outside of the jurisdiction, which has previously precluded this type of order from being made. This order meant that the exchange, located outside of the UK, was ordered to disclose information which may assist in identifying the perpetrators of fraud. Given the tendency for exchanges to base themselves in less heavily regulated jurisdictions, it will be interesting to see how the exchanges react to the English courts intervening in this way.

What does this all mean for crypto asset holders?

As the crypto market continues to expand, a growing number of interesting crypto-related judgments are being handed down. We can see how the law is being developed in a cautious way and longstanding legal principles are being adapted to deal with crypto asset disputes. One thing that we can certainly take away from the various judgments handed down to date, is that claimants will need to be creative in their use of existing legal principles to guide the courts to find a way through to assist claimants and enable the common law to keep up with a rapidly evolving business environment.

For more information on crypto-related cases, please contact us.

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